SENATE BILL NO. 300 "An Act relating to loan participations and development finance projects of the Alaska Industrial Development and Export Authority; and relating to loans from the rural development initiative fund." 9:25:02 AM TED LEONARD, EXECUTIVE DIRECTOR, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA), DEPARTMENT OF COMMERCE, COMMUNITY, & ECONOMIC DEVELOPMENT, thanked the committee for hearing the bill. He reported that AIDEA has been going through a strategic process for the last year to improve and increase its effectiveness and add new tools to the organization that can help promote economic development. The changes requested in this statute are the first steps for AIDEA to improve its programs and add another assisting tool for economic development. Mr. Leonard reported that the first section of the bill is intended to modernize the way that AIDEA sets rates for loans that are funded through internal funds. One of the main ways that AIDEA promotes economic development is providing Alaska businesses long-term capital at affordable rates for commercial development expansion. Current rates are set by analyzing the current market environment. He related that the bond market has been unstable over the last two years, resulting in a fluctuation of AIDEA's rates between 6 percent and 10 percent. Banks have been fairly stable. This mechanism has taken AIDEA out of the market several times when it should have been helping Alaskan businesses. 9:27:39 AM Mr. Leonard explained that the second section of the bill adds an interest rebate program, which would allow for a rebate on certain loan participations based on specific criteria set through regulations. It would allow businesses that are investing in difficult environments a chance to have some relief on their cash flow for the first five years. Mr. Leonard reported that the third section clarifies in statute that AIDEA has the ability to own a part of an infrastructure investment instead of the whole. Clarifying the statute will help AIDEA in the development of larger infrastructure projects such as a port addition. Mr. Leonard explained that Sections 4 and 5 relate to the rural development initiative fund and are to encourage better use of the program in rural areas. 9:29:34 AM MARK DAVIS, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA), DEPARTMENT OF COMMERCE, COMMUNITY, & ECONOMIC DEVELOPMENT, explained that the first section of the bill would change the way in which AIDEA sets its minimum interest rate under the commercial finance program, which in previous years was tied to the bond market. In 2008 the market changed and AIDEA's rates began to rise, making it non-competitive. The bill proposes to use a comparable financial security. The minimum rate for the program would be set by looking at transparent public indexes that track the cost of money. Those would include indexes such as the Federal Home Loan Bank of Seattle, the Federal Farm Credit Banks Funding Corporation Funding Cost Index, London Interbank Offered Rate (LIBOR), and Fanny May. He emphasized that the bond market is not where the state wants to be. 9:31:55 AM Co-Chair Stedman requested a clarification of terms. Mr. Davis elaborated on the definition of "points"; one point is one percent. Co-Chair Stedman asked what LIBOR was. Mr. Davis said it was the London Interbank Offered Rate, the cost of funds used by the European markets. Currently, the yield on treasury T bills is being tracked against the LIBOR to get a feel for the economy. Mr. Davis continued to say that the first section proposes to allow AIDEA to be more competitive. He emphasized the good qualities of the program and the numerous commercial loans and jobs funded. 9:33:11 AM Mr. Davis explained the second part of the bill, which is a rebate program under the same loan participation. Incentive programs at other institutions were examined and it was determined that incentive programs worked to further economic development. The bill proposes an up-to-one percent rebate for the first five years of the loan with a cap of 5 percent of the portfolio, which is very safe lending. The rebate could be given if it would create jobs, for rural development, or to achieve other economic criteria set forth in regulation. Examples would be for development in distressed areas or the creation of new technologies or for alternative energy. He predicted that the rebates would bring in new and novel types of lending. Mr. Davis turned to the third part of the bill which deals with the development finance program under which AIDEA builds large projects. Currently, the statutes are at odds. One part, AS 44.88.05, says the authority has the power to "acquire an interest in a project as necessary or appropriate". Another part of the same statute, AS 44.88.010a says AIDEA can "incur debt to own and operate facilities". The decision had been made by means of Department of Law interpretations, that AIDEA could only own a complete portion of a project. He used the Red Dog Mine as an example, where AIDEA only owns the transportation system, but not the mine. In current markets, most development corporations like AIDEA are investing in percentages of projects and looking for private partnerships. The proposal would clarify the statute and allow AIDEA to acquire an interest and become a partner with other investors and partners. 9:36:12 AM Senator Huggins voiced concern about the governments owning a part of a project. He asked how the state would limit its liability if it was only a part owner. Mr. Davis opined that legal documentation would have to provide AIDEA with an exit strategy in all cases. Senator Thomas asked if the clarification of participation, ownership, and management of the economic development account was found on page 3, lines 10-17. Mr. Davis said that was correct. 9:38:03 AM Co-Chair Stedman referred to page 3, lines 25-27, and asked why it was important that a person could not get a second loan until a previous loan was paid off. Mr. Davis suggested Mr. Winegar answer. GREG, WINEGAR, DIRECTOR OF INVESTMENT, ALASKA INDUSTRIAL DEVELOPMENT AND EXPORT AUTHORITY (AIDEA), DEPARTMENT OF COMMERCE, COMMUNITY, & ECONOMIC DEVELOPMENT, explained that AIDEA is attempting to tie the maximum to a dollar amount, as opposed to the number of loans because some businesses will take out a small loan to get started and then may need an additional loan. The current statute allows for only one loan. The intention is to provide the flexibility to loan up to the full dollar amount. 9:39:31 AM Senator Olson asked why people in rural areas could not spread the risk, as well as the benefits, under this program. Mr. Davis explained that is the intention of the section to allow for more partnerships and allow everyone to have "skin in the game". Senator Olson assumed the transportation system in the Red Dog area would have some input from the borough or from the local entity. He asked if AIDEA would support that idea. Mr. Davis said he would have to see the amendment first. If it is a good business decision, AIDEA would tend to support it. SB 300 was heard and HELD in Committee for further consideration. 9:42:58 AM